L21: Social Security Flashcards

1
Q

life cycle model

A

predicts that individuals work and save when young, living off principal and interest on savings when old

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2
Q

justifications for social insurance and social security

A

myopia/lack of self-control
- individuals unable to save enough for retirement

lack of annuity markets
- uncertain life expectancy

inability to work
- early disability

samaritan’s dilemma
- individuals rationally save too little if there is means-tested old-age assistance
- SS forces them to save

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3
Q

social security details

A

individual has to have worked and paid payroll taxes for at least 10 years and must be 62+

financed through the federal insurance contributions act (FICA) tax on earnings

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4
Q

funded vs unfunded pension systems

A

funded
- contributions invested in financial assets that pay for benefits in the future
- each generation funds their own benefits

unfunded
- contributions pay for benefits of current recipients instead of being invested to pay for future benefits

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5
Q

funded system equation

A

current benefits = past contributions by benefit recipients + market returns on contributions

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6
Q

unfunded system equation

A

current benefits = current contributions

rate of return on contributions depends on growth of payroll = n + g (n as population growth and g as the rate of real wage growth per worker)

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7
Q

social security redistribution

A

across cohorts
- unfunded system gives windfalls to early generations and below-market returns to later ones

within cohorts
- replacement rates fall with income

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8
Q

social security wealth

A

expected PDV of a person’s future social security benefits - expected PDV of payroll tax payments

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9
Q

rationale for social security

A

individual failure as the main one
- people won’t save enough for retirement without being forced to do so

people who are forced to save aren’t harmed by it anyways

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10
Q

crowding out and myopia

A

large share of elderly rely almost exclusively on social security benefits

old-age poverty declined sharply over time as social security benefits increased

social security crowds out private saving but crowding out is incomplete

fall in expenditures at retirement, suggesting further drop without social security

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11
Q

another rationale for social security

A

form of an annuity paid while individual is alive

for myopic individuals, saving until retirement isn’t the only problem
- need to maintain resources in retirement
- prevents overconsumption of wealth in early years of retirement

private annuity market has the problem of information asymmetry

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12
Q

how does social security affect retirement behaviour?

A

generosity of benefits

availability of benefits at the early entitlement age

actuarial adjustment of benefits for those who delay retirement to full benefits age or maximum age

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13
Q

social security reforms

A

raise tax revenues collected and the tax rate on taxable wages

extend base of taxable wages

reduce benefits paid out

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14
Q

more fundamental reform: privatisation

A

replacing all or part of the public system with a system of private accounts like 401ks

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15
Q

issue with the privatisation argument

A

still needs to find alternative source of funding for legacy debt (existing unfunded liability)
- burden of this debt offsets higher market returns on private accounts

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16
Q

pros and cons of privatisation

A

gives individuals an opportunity to invest in a range of assets which have the potential for higher returns but also higher risks

individuals have limited financial literacy
- danger of making bad investment decisions
- might become a government cost to deal with old-age poverty

costs of administration of large numbers of small accounts could be substantially higher than those of a public system